Where next for inflation?

We are in a period of high inflation of prices for goods and services. The Office for National Statistics (ONS) shows one of the inflation indices has increased by 6.2% in the 12 months to March 2022.

This is the highest that CPIH (Consumer Prices Index including owner occupiers’ housing costs) has been since 1992. Among the main components of this increase are transport costs, such as petrol and diesel and the price of second-hand cars.^[1]

The Government Actuary’s Department offer commentary on the reasons and recently stated that:

“During the pandemic prices for some goods and services fell, such as for eating out and holidays abroad. This reflected a rapid fall in demand which quickly shifted when demand gradually returned and supply then became challenging. Lockdown and workforce availability were key causes, but another factor was the reliance of so many products on semiconductors.

They feature in ever more numbers of products such as computers, cars and even kettles. The demand for semiconductors has been increasing faster than the supply can keep up with.”

This has been compounded by other factors, such as the surge in early retirements during the pandemic and increasing energy prices due to the geopolitical situation and war in Ukraine.

These factors, and increasing semiconductor production, can be managed with a view to bring prices back down again. However, solutions such as building new semiconductor manufacturing facilities take time, so until then, prices increase.

The BIG question is where next for inflation?

Inflation also poses a risk for business and financial institutions (such as pension funds and insurance companies) as we do not know how it will evolve. There will be scenarios, which may seem unlikely but nonetheless plausible and which could lead to financial difficulties.

Mitigations may be available but will usually come at a cost. This could be purely financial, such as buying insurance. Or it could be more complex, like carefully balancing how much inflation can be passed onto consumers in the form of higher prices.

If you own a business, then:

1. Take time to review your personal objectives – the business is there to provide you with what you want from life, and this is the most important element of any plan.
2. Look at where the business is now, its strengths, weaknesses, opportunities and threats and get a clear understanding of its position in the marketplace, the competition, the systems and the way things are done and the improvements that could be made.
3. Focus on what the business is to look like when it is “complete” or running profitably and successfully. Then you can determine priorities – the big issues that need to be focussed on – this is the plan!

It is also a good idea to look at where you are now and plan for a range of scenarios “good and bad” so that you can be flexible about the direction you should take.

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^[1] https://actuaries.blog.gov.uk/2022/04/21/inflation-its-personal/

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Posted by popcreative on 31st May 2022 09:30:48